In re: Catholic Diocese of Wilmington Inc.
Filing
17
MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 12/18/2012. (nmfn)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
In Re:
)
)
CATHOLIC DIOCESE OF
WILMINGTON, INC.,
Debtor.
KENNETH MARTIN,
Appellant,
) Bank. No. 09-13560 (CSS)
) (Chapter 11)
)
)
)
)
)
)
) Civ. No. 11-814-SLR
v.
)
CATHOLIC DIOCESE OF
WILMINGTON, INC.,
Appellee.
)
)
)
)
Ronald J. Drescher, Esquire of Drescher & Associates, P.A., Baltimore, Maryland.
Counsel for Appellant Kenneth Martin.
RobertS. Brady, Esquire, Anthony G. Flynn, Esquire, and Patrick A. Jackson, Esquire,
of Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware. Counsel for
Appellee, Catholic Diocese of Wilmington, Inc.
MEMORANDUM OPINION
Dated: December 18, 2012
Wilmington, Delaware
~~udge
I. INTRODUCTION
Before the court is an appeal from the July 28, 2011 confirmation order ("the
Order") of the bankruptcy court in the above referenced bankruptcy case. This court
has jurisdiction to hear an appeal from the bankruptcy court pursuant to 28 U.S.C. §
158(a). In undertaking a review of the issues on appeal, the court applies a clearly
erroneous standard to the bankruptcy court's findings of fact and a plenary standard to
that court's legal conclusions. See Am. Flint Glass Workers Union v. Anchor Resolution
Corp., 197 F.3d 76, 80 (3d Cir. 1999). With mixed questions of law and fact, the court
must accept the bankruptcy court's "finding of historical or narrative facts unless clearly
erroneous, but exercise[s] 'plenary review of the [bankruptcy] court's choice and
interpretation of legal precepts and its application of those precepts to the historical
facts."' Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 642 (3d Cir.
1991) (citing Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d
Cir. 1981 )). The district court's appellate responsibilities are further informed by the
directive of the United States Court of Appeals for the Third Circuit, which effectively
reviews on a de novo basis bankruptcy court opinions. In re Hechinger, 298 F.3d 219,
224 (3d Cir. 2002); In re Telegroup, 281 F.3d 133, 136 (3d Cir. 2002).
II. PROCEDURAL BACKGROUND
On October 18, 2009, the Catholic Diocese of Wilmington, Inc. ("the Diocese")
filed a petition in the United States Bankruptcy Court for the District of Delaware for
relief under chapter 11 of the United States Bankruptcy Code, 11 U.S.C. §§ 101-1532.
On November 19, 2009, the Diocese sought court approval for an "order authorizing it
(1) to continue providing pensions, sustenance and/or medical coverage in the ordinary
course to certain retired or removed priests accused of sexual abuse; and (2) to use
certain restricted funds to pay prepetition priest pension obligations" ("the sustenance
motion"). (D.I. 3, ex. 4) The sustenance motion was opposed by the Official
Committee of Unsecured Creditors ("Official Committee"); the "Unofficial Committee of
State Court Abuse Survivors" ("Ad Hoc Committee") joined in the opposition. (/d., exs.
6, 7) After protracted litigation, the sustenance motion was dismissed by order signed
February 19, 2010. (/d., exs. 20-31) Appellant Kenneth Martin ("appellant") filed a
proof of claim in the Diocese' chapter 11 case on April 14, 2010. (D.I. 13, ex. 2)
The Diocese filed a second amended plan of reorganization on May 23, 2011.
(D. I. 3, ex. 32) In said plan, the clergy pension plans were unimpaired, and the Diocese
sought permission for the reorganized debtor to manage its property and its affairs
without further order of the bankruptcy court. (D.I. 2, ex. 11 at 123) The Ad Hoc
Committee filed its opposition to said plan on June 30, 2011, citing three objections: (1)
to the timing of payment and distribution to survivors; (2) to payment of professionals
for the Ad Hoc Committee from the settlement trust rather than by the Diocese; and (3)
to excluding counsel for the Ad Hoc Committee from the protection of the
indemnification provision. (D.I. 3, ex. 41) By "comment," also filed on June 30,2011,
the Official Committee expressed that it was "deeply offended by the Plan's treatment
of the Clergy Pension Claims or Other Unsecured Claims asserted by anyone who is
responsible for Abuse." (/d., ex. 42)
At the July 8, 2011 confirmation hearing, the Diocese called Bishop Malooly as a
witness in support of its plan of reorganization. Bishop Malooly was cross-examined on
2
the issue of clergy pension claims, and testified that he had no intention of giving
money or benefits in the ordinary course to certain individuals named by counsel for the
Ad Hoc Committee. (ld., ex. 44 at 61-76, 110-112) Following the hearing and at the
request of the bankruptcy court, the Diocese submitted a letter brief that addressed the
canonical obligation of a Roman Catholic diocesan bishop to provide sustenance or
charity to clergy. (ld., ex. 45) Counsel for the Ad Hoc Committee filed an objection to
said letter on the grounds that it contained expert testimony. (!d., ex. 46)
In anticipation of the continued confirmation hearing, the Ad Hoc Committee filed
a bench memo on July 13, 2011 in opposition to what it labeled the "renewed"
sustenance motion. (D. I. 2, ex. 5) In its submission, the Ad Hoc Committee sought
affirmative relief by urging the bankruptcy court to issue an injunction (hereafter, "the
Injunction") in one of the two following alternate forms:
The Reorganized Debtor, the Bishop, and the Non-Debtor Catholic
Entities under the Plan, and their successors and assigns, officers,
agents, servants, employees and attorneys are forever barred and
permanently enjoined from providing any money, salary, wages,
employment benefits, pension, medical benefits, housing benefits,
medical insurance, other financial benefits of any kind whatever,
sustenance or charity to Francis G. Deluca, Douglas W. Dempster,
Edward F. Dudzinski, Kenneth J. Martin, Joseph A. McGovern, Francis J.
Rogers, John A. Sarro, Charles W. Wiggins, or Harry P. Weaver.
*******************
The Reorganized Debtor, the Bishop, and the Non-Debtor Catholic
Entities under the Plan, and their successors and assigns, officers,
agents, servants, employees and attorneys are forever barred and
permanently enjoined from providing any money, salary, wages,
employment benefits, pension, medical benefits, housing benefits,
medical insurance, other financial benefits of any kind whatsoever,
sustenance or charity to Francis G. Deluca, Douglas W. Dempster,
Edward F. Dudzinski, Kenneth J. Martin, Joseph A. McGovern, Francis
3
J. Rogers, John A. Sarro, Charles W. Wiggins or Harry P. Weaver
without first notifying the Court in writing of its consideration of such action,
then filing a Motion seeking such relief, notifying all parties with interest in
such a proceeding, including current state court counsel for any survivor or
childhood sexual abuse, and seeking an order of the Court approving such
action after notice and an opportunity to be heard by state court counsel
and their clients.
(!d., ex. 5 at 7-8)
The bankruptcy court entertained argument on the above request the following
day. Despite the fact that the record had been closed and no notice had been given to
opposing counsel, the Ad Hoc Committee asked the bankruptcy court to admit as an
exhibit an undated letter1 authored by deceased Bishop Saltarelli ("the Saltarelli letter")
and captioned "Update on sexual abuse of minor by priests." The Saltarelli letter reads
in pertinent part as follows:
I have decided to disclose the names of 18 of the 20 priests of our
diocese, both living and deceased, about whom we have received
admitted, corroborated or otherwise substantiated allegations of
sexual abuse of minors. . . . By disclosing the names and locations
of those living priests about whom we have received admitted,
corroborated or otherwise substantiated allegations of sexual abuse,
we perhaps in some way may help prevent or deter any further
incidents.
(!d., ex. 1) The name of appellant was included among the 18 priests so identified.
The bankruptcy court admitted the letter over the objections of appellant. It is not
altogether clear the basis upon which the document was admitted. (See id., ex. 11 at
168-172)
Appellant objected to the bankruptcy court's considering the Ad Hoc Committee's
1
Referred to in oral argument as "Bishop Saltarelli's 2006 letter." (/d., ex. 11 at
167).
4
request for injunctive relief. In this regard, appellant raised due process concerns,
arguing that he was "entitled to notice and an opportunity to be heard before his
opportunity to receive sustenance under any circumstance should be denied by this or
any other court." (/d., ex. 11 at 137) Without addressing appellant's due process
concerns, the bankruptcy court ruled from the bench as follows (in pertinent part):
I have in front of me a civil entity, which is the Catholic Diocese of
Wilmington, a corporation that is in bankruptcy and is seeking a discharge
of its liabilities and confirmation of a plan that treats different types of
creditors in different ways ....
One of the requirements that the debtor has to make and approve to get
confirmed is that the debtor is operating in good faith; that's under
1129(a)(3). And I have [an] independent duty as the judge to make the
findings under 1129 in order to confirm a plan. And again, 1129(a)(3) is
that the plan [is] proposed in good faith.
This plan impairs, albeit consensually, abuse survivors and it doesn't
impair among others the abuser priests. It goes on to reserve the right
as provided for in the Code to use its post-reorganization property as it
sees fit. Under the unique circumstances [of] this case, however, I find
that doing so, reserving the right to make payments to the abuser priests
while impairing claims of abuse survivors, in asking for that, the debtor
is not proposing a plan in good faith and I cannot make an 1129(a)(3)
finding that allows that.
The language proposed by [counsel for the Ad Hoc Committee], I think
with some tweaking, would solve the issue for the debtor but I'm not here
to - - negotiate. My concern is that a plan that allows the debtor going
forward to use property belonging to the reorganized debtor or the nondebtor
Catholic entities to make any financial payment whatsoever to any of
these abuser priests. I'm not going to confirm a plan unless there is some
sort of prohibition on that because I don't think the debtor would be
operating in good faith. And that's my ruling on that point.
(!d., ex. 11 at 177)
There followed a period of time when plan modifications were circulated. On
July 27, 2011, the bankruptcy court conducted a status conference on the continued
5
confirmation hearing, wherein counsel for the Diocese and counsel for the Ad Hoc
Committee "proposed to the court competing forms of language in order to effectuate
[the Injunction] ruling of the court during the July 14, 2011 session of the confirmation
hearing." (/d., ex. 8) The Diocese published a notice that same day declaring that on
July 28, 2011, the court "will consider including the competing forms of language
[regarding the Injunction] ... in the order confirming" the second amended plan of
reorganization. (/d. ex. 8) Appellant filed an objection to the second amended plan,
also on July 27, 2011. (/d., exs. 6, 7)
On July 28, 2011, when the confirmation hearing resumed, the issue of the
Injunction was addressed. Appellant once again objected to the proposed plan
language regarding the Injunction. More specifically, appellant argued that "the phrase
'abuser priest' should recognize the concept of the nexus that [the bankruptcy court
was] concerned about," and suggested in this regard that, rather than using the list of
names found in the Saltarelli letter, the bankruptcy court focus instead on the survivor
claims; i.e., that the plan define "abuser priests" in connection with the survivor claims.
(/d., ex. 12 at 20-21) In response, counsel for the Diocese argued that such a
procedure would violate Rule 65 2 as not describing in sufficient detail who is covered by
the Injunction. (/d., ex. 12 at 31) The bankruptcy court endorsed use of the "list of
those [eight] names ... as the enjoined parties." (/d., ex. 12 at 34)
With respect to the propriety of the Injunction, the bankruptcy court found the
entry of a permanent injunction to be "quite appropriate." (/d., ex. 12 at 45) More
2
This is the first and only mention by anyone of Fed. R. Civ. P. 65 and its
requirements for entry of injunctive relief.
6
specifically, the bankruptcy court found that there
is no right to ongoing pension. This is not an ERISA pension, this is a
state law pension and, under state law, terminable at will. ... I think it's
appropriate to carve individuals out in this instance based on a pres -well, not presumption, but based on an allegation that I think has a lot of
weight of evidence behind it. . . . [A]s there is no legal right to any payment
-and in fact ... , it could be the debtor's choice to terminate the pensions
in connection with this. I'm going to make them do it and I'm going to enter
an injunction because I think it's the right thing to do, and I think it's [the]
only way the debtor can be operating in good faith. And again, under 1129
I need to make that good faith finding. So I'm going to overrule the
objections and I will approve provisions that are consistent with this
concept.
(/d., ex. 12 at 47)
On July 28, 2011, the bankruptcy court entered its "Findings of Fact, Conclusions
of Law, and Order Confirming the Second Amended Chapter 11 Plan of Reorganization
of Catholic Diocese of Wilmington, Inc.," which provided in pertinent part as follows:
55. Modification of Clergy Pension Plan. The Debtor shall modify
the Clergy Pension Plan to provide that Francis G. Deluca, Douglas W.
Dempster, Edward F. Dudzinski, Kenneth J. Martin, Joseph A. McGovern,
Francis J. Rogers, John A. Sarro, Harry P. Weaver, and Charles W.
Wiggins (the "Removed Priests") shall be ineligible for benefits of any
kind arising on or after the Petition Date. Such modification is hereby
approved pursuant to§ 363(b) of the Bankruptcy Code, effective as of the
Confirmation Date.
56. Objection to Certain Claims. Within sixty (60) days after the
Confirmation Date, the Debtor shall object to any and all Claims, in their
entirety, of the Removed Priests asserted against the Debtor, regardless
of whether such Claims are asserted as pre-petition, post-petition, or
post-confirmation Claims (the "Removed Priest Claims"). The Plan shall
be modified accordingly.
57. Prohibition of Consideration to Certain Individuals. Catholic
Diocese of Wilmington, Inc. and each of the Non-Debtor Catholic
Entities organized and existing as a civil, corporate and secular entity
under the laws of a State, shall be the "Enjoined Civil Entities." The
Enjoined Civil Entities shall be forever barred and permanently enjoined
from providing any money, salary, wages, employment benefits, pensions,
7
medical benefits, housing benefits, medical insurance, sustenance, charity,
or other financial benefits of any kind whatsoever, to the Removed Priests.
This injunction shall further preclude the direct or indirect use of the assets
of the Enjoined Civil Entities, whether by the Enjoined Civil Entities
themselves or by their officers, agents, servants, employees, and attorneys,
to provide any of the enumerated benefits to any of the persons listed.
Notwithstanding the foregoing, this injunction shall not apply to the payment
of any Allowed prepetition Removed Priest Claims (including any claims
arising under the Clergy Pension Plan), provided, however, that no such
payment may be made until the entry of a Final Order resolving the Debtor's
objection to the Removed Priest Claims as required by paragraph 56 hereof.
In addition, this injunction shall not apply to services provided by Catholic
Charities, Inc. in the ordinary course that are generally available to the public.
For the avoidance of doubt, this injunction shall not be construed to prohibit
the provision of any of the enumerated benefits to any of the persons listed by
any individual, in his or her individual capacity, or by any individual who holds
an ecclesiastical office (including the Bishop), in his capacity as ecclesiastical
officer, provided that such benefits are provided using assets other than the
assets of the Enjoined Civil Entities. The Plan shall be modified accordingly.
(D.I. 2, ex. 10 at 50-51) On August 8, 2011, the Diocese filed the "Conformed Second
Amended Chapter 11 Plan of Reorganization" that "contained changes requested by
parties in interest and/or the Bankruptcy Court in connection with the July 8, July 14 and
July 28, 2011 hearings regarding confirmation of the Plan," consistent with the Order.
(D.I. 3, exs. 47, 48)
Appellant timely appealed, asserting that the bankruptcy court committed error
by admitting into evidence the Saltarelli letter, ordering modification of the clergy
pension plan, classifying all of the claims of the "Removed Priests" 3 in a separate
3
The phrase "Removed Priests" is defined in section 18.20 of the second
amended plan of reorganization: "The Debtor shall modify the Clergy Pension Plan to
provide that Francis G. Deluca, Douglas W. Dempster, Edward F. Dudzinski, Kenneth
J. Martin, Joseph A McGovern, Francis J. Rogers, John A Sarro, Harry P. Weaver,
and Charles W. Wiggins (the 'Removed Priests') shall be ineligible for benefits of any
kind arising on or after the Petition Date." (D. I. 3, ex. at 51 and A-17; see also D. I. 2,
ex. 1 at 50-51,
55, 57)
o
,m
8
classification, including appellant in said class, and issuing injunctive relief pertaining to
appellant as provided in paragraph 57 of the Order. 4 The Diocese responds by arguing
that appellant is not a "person aggrieved" by the Order and, thus, has no standing to
appeal. Even if appellant were to have standing, the Diocese argues that any legal
error committed was harmless and should not mandate reversal. 5
Ill. ANALYSIS
A. Standing
"Standing to appeal in a bankruptcy case is limited to 'persons aggrieved' by an
order of the bankruptcy court." In re Combustion Eng'g Inc., 391 F.3d 190, 214 (3d Cir.
2004). "[O]ne is a 'person aggrieved' if the contested order 'diminishes their property,
increases their burdens, or impairs their rights."' Travelers Ins. Co. v. H.K. Porter Co.,
45 F.3d 737, 742 (3d Cir. 1995) (citing In re Dykes, 10 F.3d 184, 187 (3d Cir. 1993)).
As explained by the Ninth Circuit in In re Fondiller, 707 F.2d 441, 443 (9th Cir. 1983),
and cited with approval by the Third Circuit in H.K. Porter, the "person aggrieved"
doctrine
exists to fill the need for an explicit limitation on standing to appeal in
bankruptcy proceedings. This need springs from the nature of
bankruptcy litigation which almost always involves the interests of
persons who are not formally parties to the litigation. In the course
of administration of the bankruptcy estate, disputes arise in which
4
Appellant did not reply to the Diocese's responsive arguments regarding
classification of the "Removed Priests" claims. (D.I. 12 at 26-27) The court does not
address these arguments further.
5
lnterestingly, the Diocese concedes that the "Removed Priest Provisions are
unusual. And they were the product of a confirmation proceeding with a lot of moving
parts, where legal error may have been committed. However, the purpose of an appeal
is not to seek out and correct legal error for its own sake." (D .I. 12 at 11)
9
numerous persons are to some degree interested. Efficient judicial
administration requires that appellate review be limited to those
persons whose interests are directly affected.
H.K. Porter, 45 F.3d at 741 (citing In re Fondiller, 707 F.2d at 443). In H.K. Porter, the
Third Circuit held that Travelers Insurance Company was not a "person aggrieved"
where its property had not been diminished by the reinstatement of certain creditors'
claims against the debtor.
In arguing that appellant is not a "person aggrieved," the Diocese argues that
appellant "lost nothing on July 28, 2011 [the date the confirmation order was signed]
that he possessed on July 27, 2011." (D.I. 12 at 12) More specifically, the Diocese
argues that appellant "was already ineligible for benefits under the Clergy Pension Plan"
on July 27, 2011, citing to the July 8, 2011 hearing where Bishop Malooly stated that he
intended to amend the plan "to exclude anyone who has been accused of child abuse
and that has been substantiated." (D. I. 3, ex. 44 at 55) The Diocese further argues
that, although the confirmation order required it to object to appellant's claim, "on July
27, the [Diocese] already intended to object to" said claim, citing its omnibus reply to the
various objections to confirmation of the plan. (Id., ex. 43 at C3) The Diocese
contends that, because appellant was not receiving any other consideration from the
Diocese and the Diocese "had no intention to providing any," the confirmation order did
not result in any direct pecuniary harm to appellant.
Even accepting as true the representations of the Diocese that the confirmation
order did not strip away any benefits to which appellant was presently entitled, 6 the
6
Appellant disputes this fact, and the Diocese is relying only on a future
"intention" of the Bishop to buttress its position.
10
court concludes that the Order did increase appellant's burdens and/or impair his rights.
Unlike the insurance company in the H.K. Porter case, which was left to litigate its
prospective rights in the ordinary course of business, 7 the bankruptcy court, through the
Injunction, essentially terminated any civil rights appellant had to seek any such
benefits post-petition. 8 In this regard, therefore, Third Circuit precedent is
distinguishable.
The Diocese further argues that the Injunction was a consensual provision
entered into by the parties to the chapter 11 plan 9 and that, while appellant is the
subject of the Injunction, he is not subject to the Injunction and, therefore, has no
standing to appeal its entry. (D.I. 12 at 18) The court disagrees. There can be no
dispute that appellant is the subject of an injunction that, by forever barring and
permanently enjoining the Diocese and other non-debtor entities from providing
appellant any consideration whatsoever, forecloses appellant's rights to pursue any civil
7
The Third Circuit's having found that the insurer's interest in the bankruptcy
proceeding was too contingent to have been directly affected by the order reinstating
the claims against the debtor.
8
The court recognizes that, although paragraph 56 of the Order requires the
Diocese to object to appellant's bankruptcy claims, such claims would be adjudicated
through the normal course and, therefore, do not raise the same concerns as the
Injunction. Indeed, the bankruptcy court found it to be "important to preserve those due
process rights for the pre-petition claims that have been filed .... Certainly all
defenses or points in any kind of contested claim objection process are fully preserved,
and we'll have to deal with that at the appropriate time." (D.I. 2, ex. 12 at 46)
9
Aithough the Diocese cites In re Coram Healthcare Corp., 315 B.R. 321, 336
(Bankr. D. Del. 2004), for the proposition that "[a] chapter 11 plan is a contract, and
parties to that contract are free to agree to an injunction limiting their freedom of action"
(D. I. 12 at 18), the bankruptcy court in that case simply held that "a Plan is a contract
that may bind those who vote in favor of it."
11
remedies long after the bankruptcy case is closed (again, unlike the insurance company
in H.K. Porter). (See D.l.12 at 19, 22) Rather than acknowledgethatthisfar-reaching
Injunction impairs appellant's prospective rights to pursue civil remedies outside the
bankruptcy context, the Diocese instead argues that appellant should also be deprived
of the opportunity to challenge the propriety of such an Injunction through this appeal,
because the Injunction was a creature of contract to which appellant was not a party. In
so doing, the Diocese ignores both its acknowledgment (when it advised appellant that
an injunction was going to be sought that "may prejudice your legal rights") and that of
the bankruptcy court (describing the category of removed priests as "the enjoined
parties") that appellant's legal rights were going to be impaired by the entry of the
proposed Injunction. (See D. I. 2, ex. 8 and ex. 12 at 34)
In sum, the court rejects the notion that a party who was fully engaged in the
bankruptcy proceedings somehow loses standing to appeal the resulting decisions
simply because, in this instance, he did not prevail and the Injunction was
"consensually" entered at the bankruptcy court's insistence. The court, therefore, finds
that appellant has standing to appeal the entry of the July 28, 2011 confirmation order.
B. Injunction
As the court understands the essence of the appeal at bar, appellant objects, as
he did consistently throughout the confirmation process, to the entry of the Injunction
and to his being included among the subjects of the Injunction. The record
demonstrates in this regard that the only reason appellant was included among the
subjects of the Injunction was because the bankruptcy court required the Diocese to
use "a specific list" of those "eight names" as the "enjoined parties," consistent with the
12
list of names taken from the Saltarelli letter. (D. I. 2, ex. 12 at 34)
Nonetheless, the Diocese insists that the admission of the Saltarelli letter "could
[only] constitute reversible error ... if [appellant's] inclusion in the Removed Priest
Provisions implicitly depended upon his status as an actual abuser." (D. I. 12 at 25)
(emphasis in original) According to the Diocese, because the Order "makes no findings
whatsoever with respect to" appellant and the only relevance of the "Removed Priest
Provisions" was to "remedy" the bankruptcy court's bad faith finding, the Saltarelli letter
was admitted for the sole purpose of demonstrating the state of mind of the Diocese,
pursuant to Fed. R. Evid. 803(3), and was harmless error. (/d.)
There can be no dispute, however, that the Order imposed a permanent
injunction that directly affected a category of individuals ("Removed Priests"); the
category of "Removed Priests" was embraced by the bankruptcy court based solely
upon the Saltarelli letter. The Saltarelli letter is not a legal document; there is no
indication that it was intended to confer or eliminate legal rights. It was written by then
Bishop Saltarelli (now deceased) who represented in a conclusory fashion that he had
"admitted, corroborated or otherwise substantiated allegations of sexual abuse of
minors" concerning the priests named therein. (D.I. 2, ex. 1 at 1; ex. 12 at 34, 45)
Appellant was included in the list and, therefore, subject to the provisions of the Order.
The court is hard pressed to understand how the Diocese can argue, in good faith, that
the Order does not have very real consequences for appellant based on the truth of the
allegations contained in the Saltarelli letter, that is, that appellant and the others
identified therein should be deprived prospectively not only of all civil benefits provided
by the Diocese and other non-debtor entities, but also of all redress for said deprivation,
13
based on their status as alleged abusers. Admission of the Saltarelli document under
these circumstances was legal error. 10
As described above, the keystone of the Injunction is the list of "Removed
Priests" taken from the Saltarelli letter; the Injunction would be meaningless at best,
over-broad at worst, if there were no defined target of the injunctive relief. The question
becomes whether the Injunction survives if the Saltarelli letter was improperly admitted.
In this regard, bankruptcy courts enjoy broad authority to issue injunctions under§ 105
of chapter 11 of the United States Code, which provides that bankruptcy courts "may
issue any order, process or judgment that is necessary or appropriate to carry out the
provisions of this title." 11 U.S.C. § 105(a). "By its very terms, § 105(a) authorizes only
court orders that are necessary to carry out the provisions of the [Bankruptcy] Code." In
re Richard Potasky Jeweler, Inc., 222 B.R. 816, 825 (S.D. Ohio 1998). See also
Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988).
In this case, the bankruptcy court tethered the grant of a permanent injunction to
the good faith requirement found in§ 1129(a)(3), to wit, the Diocese was required to
include the Injunction in its plan of reorganization in order to demonstrate that it was
operating in good faith. The court has found no cases with similar facts, that is, any
cases that impose a permanent, prospective injunction on non-debtors that has no
10
To the extent the Saltarelli letter was admitted as an exception to the rule
against hearsay, the record lacks sufficient indicia of trustworthiness as to the matters
asserted therein. See, e.g., Fed. R. Evid. 803(6)(E); Fed. R. Evid. 804(3)(B); Fed. R.
Evid. 807(a)(1 ). To the extent that the Saltarelli letter was admitted as "an opposing
party's statement," the real opposing party in these proceedings has not been the
Diocese but appellant; clearly the Saltarelli letter does not represent an admission by
appellant.
14
impact whatsoever on the estate of the debtor. For instance, the court in In re Richard
Polasky Jeweler, Inc., 222 B. R. at 826, explained that "any permanent injunction
granted pursuant to§ 105(a) must have a direct and immediate connection to the
property contained in or the administration of the debtor's plan of reorganization in
order to be proper." Likewise, in In re Labrum & Doak, LLP, 237 B.R. 275 (Bankr. E. D.
Pa. 1999), the bankruptcy court approved the imposition of an injunction to prevent
further actions by creditors of a debtor against the partners of said debtor (non-debtor
third parties). The bankruptcy court held that§ 105(a) could be a basis for extending
relief to non-debtors "if and only if' the moving parties satisfied the following four
requirements:
[1] that there be the danger of imminent, irreparable harm to the estate
or the debtor's ability to reorganize ... [; 2] ... there must be a reasonable
likelihood of reorganization[; 3] the court must balance the relative harm as
between the debtor and the creditor who would be restrained[; and 4] the
court must consider the public interest; this requires a balancing of the public
interest in successful bankruptcy reorganizations with other competing social
interests.
/d. at 306 (emphasis added) (quoting In re Monroe Well Service, Inc., 67 B.R. 746, 75253 (Bankr. E.D. Pa. 1986). The bankruptcy court in In re Labrum & Doak then went on
to review the four Monroe Well requirements, finding that the settlement with the third
party partners was an "essential source of funding" and that failure to impose the
injunction would likely result in a "multiplicity of actions by creditors and by and between
settling and non-settling partners," thus resulting in a "disorderly and inequitable
distribution of assets to creditors, contrary to the contemplation of the Bankruptcy
Code." In re Labrum & Doak, 237 B.R. at 306. With respect to the requirements that
15
the bankruptcy court balance the harms between the parties, the court concluded that,
if the injunction were not granted, "the prospects for the continuing implementation and
funding of the Plan are significantly adversely affected, which in turn adversely and
significantly affects the Debtor, and the settling Defendants, and ultimately the creditors
as well." /d. at 307. As to the public interest, the bankruptcy court found that, "[b]y
protecting the assets of the partners from contribution and other suits, the injunction at
issue conserves the assets of the partnership available under state law to satisfy
partnership debts." /d. The bankruptcy court concluded, based on the evidence
presented, that the Administrator "established each element of the four requirements
enunciated ... in Monroe Well Service." /d. at 308.
In this case, the bankruptcy court imposed a permanent injunction on third
parties without referring to any evidentiary requirements like those identified above, and
without requiring the Diocese (or the Official Committee or the Ad Hoc Committee) to
bear any burden of proof in that regard. Moreover, the record demonstrates that the
imposition of the Injunction will have no impact on the property of the estate, as the
Diocese has represented, through its agent under oath, that it has no intention of
providing any prospective benefits to appellant or other similarly situated individuals.
The Diocese has successfully reorganized and, in so doing, has demonstrated its good
faith by vigorously defending the entry of the Injunction on appeal. In sum, there is no
danger of any harm, let alone imminent, irreparable harm, to the estate or the debtor's
ability to reorganize. In balancing the harms, then, the balance tips toward appellant,
who has been stripped of any civil redress.
In weighing the public interest, the court does not question the motivations
16
behind the imposition of the Injunction. However, good intentions cannot trump the rule
of law and the fundamental requirement that there be a nexus established between the
wrongs alleged and the remedy imposed. No such nexus exists of record, as there is
no indication at bar that appellant was the subject of any of the survivor claims actually
at issue in the Diocese's chapter 11 proceedings, and appellant was not given the
opportunity to contest his inclusion as a subject of the Injunction.
IV. CONCLUSION
The record demonstrates that the bankruptcy court exceeded the scope of its
equitable powers under§ 105(a) when it imposed a permanent injunction against third
parties without addressing any of the requirements identified in the case law. In the
absence of any such procedural safeguards, the entry of the Injunction is reversible
error. 11
Rule 8013 of the Bankruptcy Rules provides in relevant part that, "[o]n an appeal,
the district court ... may affirm, modify, or reverse a bankruptcy judge's judgment,
order, or decree or remand with instructions for further proceedings." Because the error
made was one of law and not of fact, 12 and because it is evident from the record that
the imposition of the Injunction never had an impact on the estate of the Diocese and
no longer has any relevance to the Diocese's ability to reorganize, 13 the July 28, 2011
11
Given this conclusion, the court does not address appellant's arguments based
on the Free Exercise Clause of the First Amendment.
12
And, therefore, reviewed de novo.
13
The Diocese having shown its good faith via the sworn, live testimony of Bishop
Malooly and its substantial efforts to defend the entry of the Injunction on appeal.
17
confirmation order is modified to excise paragraph 57.
An appropriate order shall issue.
18
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